Wednesday, August 8, 2007
The Rototilling Corvette: Davenport v. Bates, 61 U.C.C. Rep. Serv. 2d 542.
Owning a Corvette is the life-long dream of the typical American male – a dream which for some turns into an insatiable search for the fountain of youth sometime after turning 40. So, in May of 2000, when Michael Davenport, a self-employed landscaper, purchased a 1995 Corvette he had achieved the American Dream in the eyes of many of us (males). And even though he could only get it with financing provided by the seller ( Rick Bates, no known relation to the undersigned), who retained a security interest in the Vette just in case the good people in Davidson County Tennessee someday decided to plant their gardens themselves, no diminution of status was suffered because Davenport technically shared the Vette with the seller until he fully paid for it.
But for Davenport, the Vette was not the realization of “the Dream” itself, but was instead simply the means to get to a different, more altruistic goal, or so he testified at trial after the seller had repossessed the Vette and sold it – along with another vehicle Davenport had purchased on credit from the same seller. For Davenport, the Vette was just another tool of his trade, which, along with the shovels and rakes and other implements of destruction he carried with him, allowed him to make a living as a “professional” landscaper.
Now, if you’ve ever ridden in a Vette, or really looked at a Vette, you must be wondering what role it could possibly play in landscaping. Vettes have no trunk, no back seat (you might squeeze a brief case into the “hatch” behind the seats), no place to put anything that won’t fit onto the two seats, and are too low to the ground to drive on rough, uneven surfaces, etc. As it turns out, there’s more to landscaping than playing in the dirt. When asked by counsel what he did with the Corvette once he purchased it, Davenport explained:
" I bought it to use in my landscaping business. ... [o]f course I didn’t haul dirt in it, it was a Corvette, I went and looked at jobs in it, went and collected money in it, and went and done proposals in it, things like that."
Why did this matter? One of the issues before the Tennessee Court of Appeals (Davenport v. Bates) was whether the trial court had correctly classified the Vette as consumer goods when it added $7,777 to the damages it ordered the seller to pay after the jury had determined that the seller had failed to properly notice the resale. Classifying the Vette as consumer goods triggered application of 9-625(c)(2) which comes with the optional title “Persons entitled to recover damages; statutory damages in consumer-goods transactions,” and provides that in addition to recovering damages for any loss caused by the secured party’s failure to comply with Article 9:
"if the collateral is consumer goods, a person that was a debtor ... at the time the secured party failed to comply with this part may recover for that failure in any event an amount no less than than the credit service charge plus 10 percent of the principal amount of the obligation or the time-price differential plus 10 percent of the cash price."
9-625(c)(2). As the Court noted, this section entitled Davenport to a “sizeable statutory penalty” for the seller’s non-compliance with part 6 of Article 9.
But could the Vette really be consumer goods in the hands of Davenport, even though he refused to haul dirt in it, in light of his testimony that he bought it for use in his business and in fact had used it to conduct that business. Davenport argued it could, because, he claimed on appeal, that the evidence actually established that the Vette “was a collector’s item, and thus, inherently for personal use,” which made it consumer goods as defined by Article 9 – “goods used or bought for use primarily for personal, family, or household purposes.” Davenport reminded the Court that in Tennessee, “it is the actual use to which [something] is put and not the occupational status of the owner which is determinative.”
Turning to the record, Davenport pointed out that the testimony at trial established that the Vette was garaged, that he had it cleaned on a regular basis, that he never drove it in the rain, and, most importantly, witnesses had testified that he referred to the Vette as his “baby” and told people that he loved it. This was, Davenport asserted, “conclusive proof” that the Vette had been purchased for personal use. Attempting to cabin his trial testimony, he explained that because landscaping was not a business that required the use of a Corvette, the Vette’s only connection to his business was as a means of transport to and from his employment, a use the Court had determined was personal in a prior decision.
The Court easily identified the flaw in Davenport’s argument: none of the evidence he claimed supported the trial court’s classification of the Vette went to his actual use of the Vette. The court explained
"[i]n searching the extensive transcript of the testimony in this case, we are unable to locate a single reference to an occasion of [Davenport] driving the car for personal or family use. To the contrary, all of [Davenport’s] testimony relates to his use of the car in his business."
The Court also rejected Davenport’s assertion that he had no use for the Vette in his landscaping business. Noting that he had identified various commercial uses for the Vette when he testified at trial, the Court opined that his occupation would “qualify as a business requiring the use of an automobile.” The Court went on to explain:
"Although he may not have needed a Corvette, specifically, he needed some type of vehicle and chose to purchase a Corvette. If [Davenport] had used another truck or a less expensive car and testified that he used it for these same commercial purposes, the vehicle would clearly not be classified as a consumer good."
Because the evidence was inconsistent with his claim that the Vette was for personal use, the Court refused to accept Davenport’s argument based on the ‘inherent nature” of a corvette as a collector’s item. Accordingly, it vacated the $7,777 awarded by the trial court as a statutory penalty under 9-625(c)(2).
Why did Davenport work so hard at trial to paint the Vette into his landscape business? (Forgive me!) Surely if he was seeking the statutory damages the trial court awarded, his lawyer must have understood the need to establish that the Vette was a consumer good in Davenport’s hands. Why, then, was it Davenport’s lawyer that solicited the testimony that gutted his claim? That the Vette was a consumer good should have been a slam dunk – what else could a car with such limited utility possibly be? Did the lawyer think that to establish a “commercially” unreasonable disposition he had to establish that the Vette was used in a “commercial” operation? If that is the solution to our little mystery, I’d love to see the big smile on Grant Gilmore’s face right now. LTB
Wednesday, August 1, 2007
Circuit Split: More on the Hanging Paragraph
As discussed in an earlier post, BAPCPA added a hanging paragraph to section 1325(a)(5), one which has caused consternation in the bench and bar. Recall that this hanging paragraph precludes a debtor from bifurcating a secured creditor's claim into secured and unsecured portions based on the value of the collateral when the collateral is a car purchased within 910-days of the filing. In July, the Seventh Circuit and a 10th Circuit Bankruptcy Appellate Panel (BAP) disagreed on whether the 910-days rule applies when the debtor surrenders the vehicle.
As a reminder, 1325(a) contains the chapter 13 confirmation requirements, and (a)(5) covers the plan's treatment of allowed secured claims. To obtain confirmation of the chapter 13 plan, the secured creditor must not object to the plan's treatment of the debt, or the debtor must propose to surrender the collateral, or cram down pursuant to section 506. BAPCPA, via the hanging paragraph, removes the latter option for 910-day car debt.
According to the Seventh Circuit in In re Wright, -- F.3d --, 2007 WL 1892502 (7th Cir. July 3, 2007), by surrendering the car to the secured creditor, the creditor received the market value of the collateral but retains the contract right to an unsecured deficiency claim. Judge Easterbrook, noting that that panel agrees with the minority position, reasoned that Article 9 of the UCC plus the law of contracts provides for a deficiency judgment unless the loan was non-recourse. See id. at *1. Simply because the hanging paragraph "takes away" a debtor's section 506 ability to bifurcate for purposes of cramdown, it does not follow that upon surrender, the entire claim is satisfied.
Citing Butner v. United States, 440 U.S. 48 (1979), Judge Easterbrook held that when section 506 does not apply, "[t]he fallback under Butner is the parties' contract (to the extent the deal is enforceable under state law), rather than non-recourse secured debt . . .or no security interest . . . .[governs]" Id. at *4.
It is notable the Seventh Circuit addressed this issue on direct appeal via 28 U.S.C. section 158 as a matter of public importance. Id. at *2. The National Association of Consumer Bankruptcy Attorneys filed an amicus brief advocating the opposite holding -- the position taken by the Tenth Circuit BAP in In re Quick, -- B.R. --, 2007 WL 194179 (10th Circuit BAP, July 5, 2007). Citing Wright, the BAP held that the hanging paragraph eliminates section 506 bifurcation for all 910-day claims, and therefore, the debtors' proposed surrender of the car fully satisfied the indebtedness to the secured lender. Id. at *4.
Reasoning that the hanging paragraph unambiguously precludes section 506 bifurcation to the entirety of 1325(a)(5), and not only to 1325(a)(5)(B), surrender fully satisfies the claim. Id. at *2.
The secured creditor, Daimlerchrysler, made an argument that the BAP's position constituted an unconstitutional taking. The BAP rejected this argument out of hand because "Bankruptcy laws have long been construed to authorize the impairment of contractual obligations." Id. at *3.
Thus, in the 7th Circuit (Wisconsin, Illinois and Indiana), surrender will not satisfy in full the secured creditor's claim, leaving the debtor with no car and an unsecured deficiency claim to be paid through the plan; in contrast, in the 10th Circuit (Wyoming, Colorado, Kansas, New Mexico, Utah and Oklahoma), the debtor can use surrender to satisfy the secured lender's claim in full.
For other circuits, see both Wright and Quick for citations to cases on this issue.
Tuesday, June 26, 2007
Who else despises the new reaff. requirements?
Reaffirmation agreements are not as easy as they used to be. Yes, there are forms, but they are not the ones your secured creditor clients like to use.
Check out In re Moustafi, --B.R.--, 2007 WL 1592965 (Bankr. D. Ariz., June 4, 2007). FYI: Individual chapter 7 case.
The court addressed whether "[i]f disapproval of the Reaffirmation Agreement means that that Debtor has failed to perform her intention as required by [section] 521(a)(2)(B), then [section] 521(d) would apply, permitting [the secured creditor] to enforce its ipso facto clause. Post-discharge, [the secured creditor] would be able to repossess the Nissan because the Debtor's bankruptcy filing is an event of default under the . . . security agreement."
In Moustafi, the bankruptcy court disapproved the reaffirmation agreement at issue (because the debtor's net monthly income was less than her expenses and the car loan was underwater); however the court engaged in a thoughtful discussion about whether a court's decision not to approve a reaffirmation triggers the new BAPCPA 362(h)(1) or renders a debtor in violation of section 521(d).
The court, even though declining to approve the reaffirmation agreement, noted that because the debtor filed her Statement of Intention within 30 days of the petition, she complied with sections 521(a)(2)(A) and 362(h)(1)(A) -- AND -- by filing the reaffirmation agreement prior to the section 341 meeting, she complied with sections 521(a)(2)(B) and 362(h)(1)(B), the debtor could retain the vehicle is she remained current on her payments.
Abreast of the main holding, the court also discussed the role of the bankruptcy judge in the reaffirmation process, the current status of the availability of "ride through, section 521(a)(6), and section 524(c) - the reaffirmation sub-section.
For both debtor and secured creditor attorneys -- if you have a reaffirmation issue, please make sure to find the form available on your district's website and carefully read section 524(k). See also In re Husain, 2007 WL 709302 (Bankr. E.D. Va. March 5, 2007) and In re Blakeley, 2007 WL 674712 (Bankr. D. Utah Jan. 17, 2007).
Re: the "ride through" issue -- see In re Ertha Rice, 2007 WL 781893 (Bankr. E.D. Pa. March 12, 2007); In re Rowe, 342 B.R. 341 (Bankr. D. Kan. 2006).
Tuesday, June 19, 2007
1325(a)(5) -- A hotbed!
Check out In re Denton, -- B.R. --, 2007 WL 1701921 (Bankr. S.D. Ga. June 12, 2007). Dicta at best as the motion for contempt was dismissed because of the chapter 13 trustee's judicial immunity, but what a great discussion of the "attorney's fee problem" via a "tortured interpretation."
Monday, June 4, 2007
Another 1325(a)(5) Issue
Kristin Schroeder Simpson
In 2004, in Till v. SCS Credit Corp., 541 U.S. 465, the Supreme Court's plurality opinion established that under pre-BAPCPA 11 U.S.C. section 1325(a)(5)(B) that the appropriate "cramdown" interest rate was not the contract rate but "prime plus risk," a calculation that should factor the plan's feasibility, the estate, and the type of security.
As discussed in the previous post, BAPCPA added new 1325(a)(5) requirements. What, if any, of the new provisions change the Till cramdown interest rate calculation for a secured creditor? A new bankruptcy ruling holds that the contract rate may rise again.
Judge Pamela S. Hollis, Bankruptcy Judge for the Northern District of Illinois, addressed a new 1325(a)(5) provision In In re Williams, -- B.R. --, available at 2007 WL 1206738 (Bankr. N.D. Ill., April 23, 2007). In Williams, the secured car lender objected to the debtor's chapter 13 plan, which provided for a 10.25% interest rate (at the time, prime + 2%). AmeriCredit, the lender, and the debtor's contract provided for a 19.75% rate. Factually significant, the debtor had previously filed chapter 13, converted to a chapter 7 and received a chapter 7 discharge in 2005. See 1328(f).
The debtor responded to AmeriCredit's objection by arguing that Till stands for the total rejection of the contract rate in a cramdown confirmation. Judge Hollis disagreed. She reasoned that Williams' argument stretched Till to a statute that it didn't address because BAPCPA section 1325(a)(5)(B)(i)(I) provides that the secured creditor retain the lien until discharge or "the payment of the underlying debt determined under nonbankruptcy law . . . ." 1325(a)(5)(B)(i)(I)(aa).
Judge Hollis holds that while Till still requires a prime plus risk calculation, the new section (aa) contains different language than (B)(ii)'s requirement that the secured creditor receive "the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim . . . . " Further noting that Till came down 11 months prior to BAPCPA's enactment [and the legislation had been pending for years], "Congress did not use the same language in 1325(a)(5)(B)(i)(I)(aa) as in 1325(a)(5)(B)(ii), and the court must therefore find that Congress meant something different." Williams, at *3.
The court sustained AmeriCredit's objection and denied confirmation, holding that the new 1328(f) precluded Williams' discharge in a chapter 13, and therefore the phrase "applicable nonbankruptcy law" in 1325(a)(5)(B)(i)(I)(aa) required her to pay the contract rate of 19.75%.
See also In re Flemming, 339 B.R. 716 (Bankr. E.D. Mo. 2006).
Monday, May 21, 2007
Is a Hanging Paragraph Like a Dangling Chad?
Kristin Schroeder Simpson
BAPCPA – it changed the bankruptcy world. That is not new news.
New news, however, is judicial interpretation of a new phrase in bankruptcy parlance – the 910-day Rule, a rule applied to a debtor's purchase-money car loan. You find the 910-Day Rule in the “hanging paragraph” in 11 U.S.C. § 1325(a).
The 910-day Rule alters the prior chapter 13 confirmation requirement that if a car-laon/secured creditor does not consent to its treatment in the chapter 13 plan, the creditor retains its lien and the debtor must pay via the plan the value of the collateral, not the full principal due. The 910-day Rule strips the bifurcation option for “new” cars. The hanging paragraph follows the last enumerated confirmation requirement -- §1325(a)(9) -- and provides:
For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30110 of title 49) acquired for the personal use of the debtor . . . .
At first blush, the parsing of the 910-day Rule is not too difficult – it’s a simple date calculation and definitional exercise. In short, if you purchased any mechanically-powered vehicle for your use on public thoroughfares in the 2 and ½ years before you filed bankruptcy (read: car, motorcycle, any vehicle in which you would try to claim an exemption), you cannot discharge the unsecured portion of the secured creditor’s claim.
Pre-BAPCPA, a debtor with a new car could bifurcate the car creditor’s claim via section 506(a) of the Bankruptcy Code and confirm a chapter 13 plan that paid out the unsecured portion pro rata with other general unsecured claims. As explained in In re Solis, 356 B.R. 398 (Bankr. S.D. Tex. 2006):
“Prior to October 16, 2005 [BAPCPA effective date], a debtor in a chapter 13 could bifurcate any claim secured by the debtor’s automobile by treating the claim as secured up to the value of the vehicle and treating the remainder of the claim as unsecured. The Court was obliged to confirm the plan if it paid the lender the present value of the secured portion of the claim and if it paid the unsecured portion in the same manner as other unsecured claims were paid.” Id. at 405 (citing Till v. SCS Credit Corp., 541 U.S. 465 (2004)).
BAPCPA obliterates this former “bankruptcy advantage” for a chapter 13 debtor’s “new” car. Now, even though immediate depreciation happens to all of us when we drive the car off the lot, bankruptcy doesn’t help you get out from underwater unless you wait 911 days after purchase to file.
The current judicial debate, however, is not over this “timing” issue; rather, courts struggle with the meaning of “acquired for the personal use of the debtor.” It matters because in many chapter 13 cases, the debtor may own more than one car, or be a signer or co-signer on more than one car loan: one for the spouse, the child, the truck to tow the boat, etc.
In the past year, several courts have supplied necessary judicial gloss to the “personal use” part of the hanging paragraph. “Personal use” is not a defined bankruptcy term. There are currently three camps defining “personal use.” First, some courts look at a totality of the circumstances test, and included therein the inquiry as to whether the acquisition of the car enabled the debtor to make a significant contribution to the family unit. See, e.g., In re Medina, -- B.R. -- , available at 2007 WL 744644 (Bankr. S.D. Tex. March 12, 2007) (Tahoe used for debtor’s transportation to work not subject to the 910-day Rule); In re Martinez, -- B.R. -- , 2007 WL 744643 (Bankr. S.D. Tex. March 12, 2007) (citing In re Johnson, 350 B.R. 712 (W.D. La. 2006); In re Hill, 352 B.R. 69 (Bankr. W.D. La. 2006)) (Taurus used for debtor’s transportation to work not subject to 910-day Rule).
A “totality plus” test looks to whether the debtor’s personal use is “significant and material, regardless of whether there is also some business use.” In re Solis, 356 B.R. 398, 409-411 (Bankr. S.D. Tex. 2006) (Dodge Ram used by non-debtor spouse for work purposes, but also used by debtor-wife for personal use subject to 910-day Rule). The Solis court rejected the contention that if the vehicle significantly contributes to income production, it cannot be for personal use, a holding made by the court in In re Hill.
Other courts determine that absent legislative guidance, the Internal Revenue Guidelines apply – thus a vehicle used for transport between home and work is not business property. See, e.g., In re Wilson, 2006 WL 3512921 (Bankr. D. Kan. 2006) (citing In re White, 352 B.R. 633 (E.D. La. 2006)) (adopting significant and material test of In re Solis and holding that Dodge pickup and Ford Expedition used for family transportation and foster care business subject to 910-day Rule).
Most recently, Judge Parker, the Chief Bankruptcy Judge for the Eastern District of Texas, in In re Adaway, -- B.R. -- , available at 2007 WL 1174882 (Bankr. E.D. Tex., April 10, 2007), held that the phrase “personal use” is a subset of the phrase “personal, family, or household use,” thus not a term of art that has a mutually exclusive meaning. Id. at * 3. Judge Parker notes that the statute must contemplate mixed use; however, predominant, exclusive personal use at the time of acquisition is not required to trigger the 910-day Rule, neither is the “mere demonstration of de minimus use of the vehicle by the debtor after its purchase be solely sufficient to nullify a debtor’s stated subjective intent that a vehicle was not acquired for his personal use.” Id. In short, Judge Parker holds that the 910-day Rule is triggered if the debtor intends personal use of the car to be significant and material at the time of acquisition. Evidence of actual use, however, is the “best available evidence to corroborate a debtor’s testimony regarding his subjective intent at the time of acquisition” – but, “cannot be absolutely determinative.” Id. In Adaway, the court determined that a Mitsubishi purchased by the debtor but used minimally by the debtor but daily by his non-debtor spouse not subject to the 910-day Rule.
In sum, if you plan to cramdown a secured car lender, or object to a debtor’s chapter 13 plan’s treatment of your secured creditor’s claim – research and review the evidence. Look at the purchase money documents – while checking the box for “personal and family use” versus business use is not determinative, it may add to the totality of the circumstances you must prove. Determine if there are any attendant warranties where the warranty is conditioned on personal use. Prior to the confirmation hearing, determine what the debtor intended at the time of acquisition, as well as what happened after purchase. Did the debtor actually drive the vehicle? Did the debtor use it as her primary transportation to and from work? Finally, look at the case law in your jurisdiction – your bankruptcy judge may have addressed this issue, or it may be addressed by other judges in your district.